An extremist, not a fanatic

February 09, 2014

Who benefits from benefits?

In the "debate" about welfare benefits, there's one point which is underweighted but so obvious that I'm embarrassed to mention it - that some form of welfare is beneficial not just to its recipients, but to capitalists.

Rightists like to point out - correctly - that the burden of taxes doesn't necessarily fall upon those who nominally pay it: corporation tax, for example, is paid by workers and not just capitalists.

But just as there's tax incidence, so there is benefit incidence; the benefits of benefits don't flow merely to their nominal recipients.

Housing benefit, for example, helps to sustain high rents and so could well be renamed landlords benefit.

Similarly, unemployment benefit helps capitalists in several ways.

One arises simply from the circular flow of income. Because "scroungers" spend their benefits, they are in effect a state subsidy to Lidl and pound shops.

You might object that this subsidy is paid out of others' taxes, which depress demand. This isn't wholly true. Those taxes don't just reduce others' spending, but their savings too. For this reason, welfare benefits are a form of balanced budget multiplier, which helps to support demand.

In this sense, there is a Malthusian case for welfare benefits. I refer not to the Malthus of the Essay on Population, but the Malthus who feared that economies would suffer from deficient demand and so said: "It is necessary that a country with great powers of production should possess a body of consumers who are not themselves engaged in production."(He was thinking of aristocrats rather than White Dee, but the economics are much the same.)

For this reason, benefits are a form of automatic stabilizer; insofar as benefit spending rises in recessions, they help reduce economic volatility. This is especially important if monetary policy lacks reliable efficacy because we're near the zero bound, or if fiscal policy can't be used counter-cyclically, say because governments can't see recessions coming.

It might be no accident that in the era of a big welfare state, economic volatility has been lower than it was in the 19th C, when we had a minimal welfare state: for example, the standard deviation of annual GDP growth was 2.5pp between 1831 and 1914, compared to 1.9pp since 1946.

Insofar as businesses require certainty if they are to invest, welfare states help to give it them.

To see some other benefits of benefits, imagine we didn't have them. We'd then have higher crime, and even starvation, neither of which are in capitalists' interests. But we'd also see: more violent opposition to redundancy plans; less geographical mobility because people would want to stay close to family and friends who could support them in hard times; and people being loath to move into potentially good but insecure jobs. In all these ways, we'd see less labour mobility. You can therefore regard a welfare state as a subsidy to the creative destruction which is necessary for higher productivity.

Now, in saying all this I don't mean to say that all welfare states are in capitalists' interests: these advantages of a welfare state must be traded off against the costs of higher taxes and - if benefits are high - a reduced labour supply. It's just that some type of welfare states - even ones which give "handouts" to "scroungers" might be in capitalists' interests.

This helps explain something. The most vocal opposition to "generous" welfare benefits comes not from the voices of capital, but from pub bores and comedy villain Mick McManus-types. The CBI - which normally yaps a lot - is relatively quiet. There's a reason for this.

Comments

"Now, in saying all this I don't mean to say that all welfare states are in capitalists' interests: these advantages of a welfare state must be traded off against the costs of higher taxes and - if benefits are high - a reduced labour supply."

But, the higher taxes are paid by other workers not by Capital. The Welfare State has always been about workers paying for the commodities capital requires them to consume in order to supply itself with the labour-power. That is true whether it is taxes to pay for commodities such as healthcare, education, social care and so on, or commodities such as social insurance.

Its also not necessarily the case that high benefits reduce the supply of labour-power. A range of in work benefits act to increase the supply of labour-power, because they mean that workers can provide that labour-power at wages below the value of labour-power. A classic example of that is that of the plight of the hand loom weavers described by Marx.

Unable to compete against power looms they dragged out a miserable existence for decades, because their earnings were supplemented out of the Parish Relief, itself as with the welfare system today, paid for out of the contributions of other workers. Had they not had that relief they could not have continued with what was a pointless exercise in trying to compete with power loom production, so the supply of their labour-power would have been removed, at least in respect of weaving.

It may be the case that a high level of unemployment benefit would enable workers to refuse to sell their labour-power at prices below a certain minimum level, but for that very reason the capitalist state will never establish such a level of Unemployment Benefit. On the contrary, at the very times when workers need them most for that purpose the state cuts them. The same is true with Pensions. The state and its apologists have been quite brazen in admitting that they established a Pension Scheme in the first place on the basis that workers would pay into it with no real prospect of living long enough to draw out of it. Once workers do begin to live long enough to draw out the pension benefits they have paid for, the state tells them they cannot have them, that they will have to work even longer before they qualify!

It would only be if workers went back to the idea they developed in the 19th Century, and which Marx advised them to defend, of establishing their own social insurance schemes, and their own welfare provision, that it could be utilised in this way.

If not, does this also mean that directors' salaries, bonuses and perks also fall on consumers, and shareholders get off scot-free?

With regard to benefits, capitalists benefit to the extent that unemployment benefits reduce the amount of savings workers need to put aside from their wages to get through periods of unemployment. Hence unemployment benefits keep demand and profitability higher than would otherwise be the case. And workers pay into unemployment insurance via NIC and income tax so the cost of income smoothing does not fall solely on capitalists.

Ticky, on incidence, I find it helpful to think of footballers. The best ones negotiate salaries after tax as they are genuinely mobile. So if tax rates go up in Spain, either the clubs make less profit, or the supporters have to pay higher ticket prices. I know it's not quite the same, just meant an illustration of the tax burden falling on different people depending who has the most negotiating power.

On Chris's point about a world without benefits (violent etc) - opponents of welfare do seem to underweight the advantages of not being killed by starving peasants. The Roman Emperors did not provide bread and circuses to the people of Rome purely out of altruism.

" 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders. Their class instinct tells them that lasting full employment is unsound from their point of view, and that unemployment is an integral part of the 'normal' capitalist system."

…

"In this situation [full employment] a powerful alliance is likely to be formed between big business and rentier interests, and they would probably find more than one economist to declare that the situation was manifestly unsound. The pressure of all these forces, and in particular of big business -- as a rule influential in government departments -- would most probably induce the government to return to the orthodox policy of cutting down the budget deficit. A slump would follow in which government spending policy would again come into its own."

I think you'll find the most vociferous critics of welfare are the low to mid income earners, who see their wages slips losing hundreds every month, and knowing and living next to people who don't work but still have as good (if not better) lifestyles than they do.

Low overhead 'welfare' systems (e.g. UBI) are highly beneficial to everyone, as it brings a level of certainty.

E.g.

Someone who can create value which is hard to quantify (e.g. the arts) can concentrate on doing that, rather than wasting their time filling shelves.

Someone who might create quantifiable value doesn't have to lobby angel investors to provide them the funding to live on while they develop their ideas. Or if they currently have a job do fund their survival, they wouldn't necessarily need one.

As you said, there are other benefits too in reduced crime etc. The 'innovation' benefit is often overlooked though.

While these arguments can be presented in defence of *a* welfare system (not necessarily our terrible one), they only cover half of people's gripes. The other most common thing I hear is "I work hard and I get little from the state. If I worked less hard then I'd get more from the state". That's a pretty valid complaint and failure of our system. That's a semi-separate discussion though.

«I think you'll find the most vociferous critics of welfare are the low to mid income earners, who see their wages slips losing hundreds every month, and knowing and living next to people who don't work but still have as good (if not better) lifestyles than they do.»

That's sheers Cameronian bullsh*t, and is a standard part of reactionary propaganda, just like mythical 3 generations of scroungers, and many other cases who happen very very rarely, like families receiving more than 25k in social insurance and usually for good reasons.

That benefits are "generous" is ridiculous, except in one case: benefits to women, and in particular single women, and particularly women pensioners. Those benefits allow unmarried women non working women to live as well as many married women and working women. But benefits paid to women are sacred, even a large majority of the benefits bill is paid for by men.

Social insurance paid to men, and in particular unemployed men, is savagely criticized, and are hated by women voters. They cannot imagine why surplus, useless men should be allowed to compete with them for public money.

From the The Times, 2011-09-17, by Janice Turner:

«The C2 women who voted Conservative last time did so because they, in low to middling-paid roles such as nurses, secretaries and carers, believed welfare had grown too generous, that benefits rewarded the do-nothings while they toiled. They hoped the Tories would crack down.»

That is fairly clear, but let's add the unwritten detail: women getting paid from state money in the South East being outraged that the shrinking pool of money that pays their wages is partially being wasted on good-for-nothing unemployed men in the North.

Then there is the other great advantage of spreading bullsh*t about fantasies like:

«knowing and living next to people who don't work but still have as good (if not better) lifestyles than they do.»

It is one of the cognitive biases often mentioned by ChrisD: that people are extremely attentive about the slightest difference with their neighbours, which they can evaluate, and being unconcerned with the far bigger issues with the hundreds of billions of free state welfare given to the City and turned by accounting spivvery into massive compensation for generating enormous deferred losses, for people who then retire as wealthy rentiers at 45.

«The other most common thing I hear is "I work hard and I get little from the state. If I worked less hard then I'd get more from the state". That's a pretty valid complaint and failure of our system.»

That's not a valid complaint, it is imbecility and/or malice...

The very essence of an insurance scheme is that the "benefits" paid to people who suffer mishaps are much bigger than than those paid to people who don't. Social insurance includes and element of insurance against being too poor to pay insurance premiums themselves. But it is not redistribution from those who "work hard" to those who "worked less hard".

In the same way those with car insurance could complain that insurers shaft them because because "I have had few accidents and get little from my insurer. If I had more accidents I would get more from my insurer".

«low to mid income earners, who see their wages slips losing hundreds every month, and knowing and living next to people who don't work but still have as good (if not better) lifestyles than they do.»

BTW this malevolent Cameronian propaganda is not new, during the Great Irish Famine it was used to denounce the Irish as gluttonous, lazy savaged who wanted to exploit a trifling inconvenience to swindle low and middle income English people of the well deserved fruits of their hard work, as these extremely graphic cartoons of the era show:

«the piles of emaciated corpses in the parks of London every winter during major economic recessions.»
«Interestingly, the Local Government Association reports that more than three quarters of the people who receive a “public health funeral” are men.»

A quick search found accidentally a totally random anecdote:

http://www.goodfuneralguide.co.uk/category/public-health-funeral/
«Undertaker Rupert Callender in Totnes is appealing to his fellow townspeople to turn out to help carry the coffin of a homeless man, Michael Gething, through the streets to his funeral — and then on to the burying ground at Follaton, just outside the town.
Mr Gething died of hypothermia. He is the fourth homeless person to die in Totnes this year.
The BBC report states that the purpose of the procession is to highlight homelessness. Knowing Rupert a little, I suppose that his purpose is actually to give Mr Gething a decent, respectful funeral, and to hold it where he lived.»

Perhaps many right-thinking citizens will be livid about being forced by the jackbooted enforcers of a vicious socialist state to pay higher taxes to give a free luxury funeral to what may be in their opinion a worth-nothing scrounger predator.

Vilifying the direct beneficiaries and purveyors of welfare works well, politically. It attracts the support of voters who are sympathetic to what may be a primal fear: the fear that they are tax paying wage slaves to a conspiracy between government and freeloaders ever so happy to loaf about while others work to pay the taxes that support their livelihood like some modern day aristocracy no more deserving.

This fear maybe primal and is unlikely to go away so politicians can really base a career on it. Its like the fear that ancient farmers had. Ever so often, all the farmers would grab torches and pitchforks and clear the woods of all the gypsy encampments who threaten to steal their harvest or, more likely, their children.

Liberals would love to associate this brand of fear based political appeal with conservatives but of course ObamaCare was sold on the basis that it would make the emergency room freeloaders pay up in advance catastrophic medical insurance premiums. So both sides of the political system simply resort to what is time tested and proven to work best at attracting the support they need to conduct their business.

«It attracts the support of voters who are sympathetic to what may be a primal fear: the fear that they are tax paying wage slaves to a conspiracy between government and freeloaders ever so happy to loaf about while others work to pay the taxes that support their livelihood like some modern day aristocracy no more deserving.»

But that is really the case, that is happening as we speak. But the aristocracy of scroungers are not the unemployed Northern men so despised by C2 female voters employed in the public sectors.

If the government and the Bank of England had not supplied hundreds of billions of public money, either donated or lent at derisory/nugatory rates, most of the UK financial sector and their extremely well paid manager and executive and traders would have disappeared.

Because most of the UK financial sector, far from being the jewel of the UK economy, actually runs at a loss over the business cycles, creating phantom book profits using accounting shysterism (under-reserving for risk) during the up-part of the cycle and distributing half of them to insiders, and then getting huge injections of public money to recapitalize during the down-part of the cycle.

The City probably produces more losses over the business cycle than the subsidies paid to nationalized industries in the 1960s and 1970s. The difference of course is that Tory and New Labour politicians love to retire to extremely well paid City directorships rather than going to work their last years on the assembly line or down the pit.

But the enormous redistribution of money from voters to City freeloaders is done fairly skilfully, by shysterism in public accounts, and via indirect means.

One of the best techniques is based on extending immense unsecured loans to insolvent financial businesses at 0.5%, when the loan rates to the most creditworthy individuals and businesses start from around 5%:

There is an interesting point here re is it housing or landlord benefit? Housing associations have shunned building new 1 bed room properties for years because they knew that they would receive more housing benefit for a single person/childless couple living in a 3 bedroom house than if those same people were living in a 1 bed property. There are now too few 1 bed homes and those in receipt of benefit are being penalised for a housing association policy that was designed to increase their surpluses

The witless discussion of where the "incidence"of a tax falls illustrates the intellectual poverty of economic discussion.

None of you appear troubled by the terms lack of definition!

Every charge is eventually incident on every other economic actor. Costs are added to prices, our they reduce supply, add infinitum. What defines the point where you stop the partial analysis and say "the tax is incident here (but no further)"?

It's supposed to depend on the elasticity of demand and price. Those who don't have the power to pass the cost bear the burden of the tax.

This might be true the short term, when if you are sick a widget maker, you just keep making widgets for less profit.

But over the longer term, the context in which tax incidence almost always actually discussed, this clearly Bollocks. Inelastic supply becomes elastic as people decide not to get into the widget business. The same thing happens to every other area of elasticity or otherwise.

As usual from economics you only get a half defined steady state partial analysis of a complex dynamic system.

Tax incidence, particularly with regards a corporate income tax, is like one of those small really bouncy balls that just goes everywhere after a hard throw in a small room. To extent the metaphor, I guess the throw is the act of value creation.

I have always suspected that incidence is a bigger problem for income taxes than for other forms of tax. Income is such a nebulous concept!

How about we tax material inputs used in production, which are really mostly environmental (and thus communal resources) anyhoo. That way, where a private benefit is derived from what is ostensibly a public good, we all get some without having to try and catch the ball.

«But over the longer term, the context in which tax incidence almost always actually discussed, this clearly Bollocks. Inelastic supply becomes elastic as people decide not to get into the widget business. The same thing happens to every other area of elasticity or otherwise.»

But one that may matter little if the velocity of diffusion of a tax change throughout the value added chain is higher than the rate at which the value added chain changes, and in the case of modest changes in taxation that seems to be the case.

However the notion that exogenous shocks like tax policy changes are "performative" in the economy is precious, even if these effects are wished away, so that this statement seems to me incorrect:

«where the "incidence"of a tax falls [ ... ] troubled by the terms lack of definition!»

Because the conventional analysis of incidence is one of comparative statics indeed:

«tax incidence is a comparison between how well off workrs/capitalist/anyone is, in the long-run, in a world with one tax structure versus a counterfactual»

"Andrew" would have a better argument if he acknowledged that the comparative statics approach is the current definition, but then that in general non-small changes in policy and particularly tax policy can change the value added chain itself.

And that's not tinkering with corporate tax rates, but for example the much lower tax rate of capital gains (e.g. on homes), and of (unconditional) stock options, in the USA have had vast effects.

Enrique, This is an example of how economic analysis is often misguided.

"will you pack it in? I mean the constantly calling everyone else stupid."

If you really insist.

" Long-run tax incidence is just that - not partial, but after all knock on effects have knocked on, entry decisions changed etc."

I'm afraid this just isn't true. Almost all economic analysis I come accross, like this concept, is based on a partial analysis. In order to even call upon a "long run" level you are assuming convergence upon and equilibrium state. This is quite obviously never going to apply, and who has done the work to suggest that this assumption is useful as a simplification?

"tax incidence is a comparison between how well off workrs/capitalist/anyone is, in the long-run, in a world with one tax structure versus a counterfactual"

So nothing more than the long run course of an entire economy under a counter-factual scenario. I thought we generally didn't rate economic predictions beyond next Tuesday. What a literally useless theoretical concept!

The idea of tax incidence seems to be contentless blather beyond the very short run.

Right. So you seem to be aware of the idea of general equilibrium, although doubtless you won't think much of it, yet you claim all economic analysis is partial. You persist in claiming the concept is not defined, yet claim that long-run tax incidence is a useless theoretical concept since we could never know it, despite that being a) actually the definition of tax incidence and b) something we can find some evidence for and c) apparently having no problem proffering theories of your own about what happens when taxes change. And if you think the concept of an economy eventually attaining a new equilibrium path in the wake of a tax change, what do you think happens, we change the tax rate and the economy spirals off into infinity?

Luis - yes indeed, general equilibrium is a fantastic example of economic partial analysis. The idea is based on a settled set of price levels determined by supply and demand, whilst taking no account of the fact that supply and demand will have changed by the very process of attaining that supposed equilibrium level. I think it is, as will be no surprise to you, complete nonsense.

Your expression "equilibrium path" it itself a nonsense, being a priceless oxymoron in this context.

If you can't something against a definition then the definition isn't much help, is it? That's the case with long run tax incidence, since there is no long run data available for counterfactuals. Even for the factual, I'm not even sure how you would define incidence. You can never tell if someone has reduced profit because they are taking the brunt of the tax, or because of other extrinsic factors impairing their ability to pass the cost on.

I proffered no theories. Judging by the offence you take at my insults, you are apparently an economist, so can't be expected to distinguish well-established models tested against a broad range of empirical observations from personal opinion and speculation. Nonetheless my personal speculation is roughly as supported as the idea of long term tax incidence.

Your last line about spiralling into infinity suggests to me that you have not the slightest acquaintance of the study of complex non-linear systems. Look outside at the weather. Tell me what "equilibrium path" you think it is on.